The Allspring Emerging Growth Fund concluded the fourth quarter of 2025 with an underperformance relative to its benchmark, the Russell 2000 Growth Index. This occurred despite a broader trend of U.S. equities achieving a third consecutive year of positive returns, with growth-focused sectors largely leading these gains. The period was further complicated by heightened macroeconomic instability, particularly stemming from a U.S. government shutdown that disrupted economic data reporting and introduced significant uncertainty into short-term growth forecasts.

Looking ahead, the fund’s management views the current valuation of quality growth stocks as appealing, believing that market sentiment has unduly depressed their prices. They anticipate that future returns will increasingly be driven by the intrinsic growth of these businesses as transient market sentiments subside. For 2026, the outlook for small and mid-cap growth equities appears promising, underpinned by attractive valuations, an expected convergence in earnings growth rates with large-cap companies, and expanding opportunities related to artificial intelligence.

Quarterly Performance and Market Dynamics

During the fourth quarter of 2025, the Allspring Emerging Growth Fund did not meet its performance objectives when compared to the Russell 2000 Growth Index. This shortfall was primarily attributed to specific stock selections within the healthcare, consumer discretionary, and information technology sectors, which yielded negative results. However, these negative impacts were partially mitigated by favorable contributions from the financials and industrials sectors. This period highlighted the intricate nature of market movements, where sector-specific dynamics can significantly influence overall fund performance, even within a generally positive market environment. The fund's strategic focus on robust growth businesses, aiming for long-term compounding, faced headwinds from these sector-specific challenges, underscoring the complexities of navigating diverse market conditions.

The broader market context for U.S. equities in 2025 was characterized by a continuation of positive returns, marking the third consecutive year of such gains. A notable feature of this performance was the concentration of these returns in growth-oriented segments of the market. This trend reflects an ongoing investor preference for companies demonstrating strong growth potential, often seen in technology and innovation-driven sectors. Concurrently, the quarter witnessed a rise in macroeconomic uncertainty, largely exacerbated by a U.S. government shutdown. This event not only disrupted the regular flow of economic data, making it challenging to accurately assess the economic landscape, but also introduced considerable volatility and noise into near-term growth tracking. Such external factors underscore the challenges fund managers face in maintaining consistent performance, as market reactions to political and economic instability can be unpredictable.

Strategic Outlook for Quality Growth and Small/Mid-Cap Equities

The management of the Allspring Emerging Growth Fund holds a positive perspective on the current valuation of quality growth stocks, viewing them as particularly attractive investment opportunities. This assessment is based on the belief that these stocks have experienced a 'de-rating' driven by prevailing market sentiment rather than a deterioration in their fundamental business prospects. Consequently, the fund anticipates that the primary driver of future returns for these investments will be the underlying growth of their businesses, as the influence of transient market sentiments is expected to wane. This strategic viewpoint emphasizes a long-term approach, focusing on the intrinsic value and growth potential of companies that are positioned on the "right side of change," or those poised to benefit from significant structural or technological shifts.

Looking forward to 2026, the fund projects a favorable environment for small and mid-cap growth equities. This optimistic outlook is underpinned by several factors. Firstly, these market segments currently present appealing valuations, suggesting that their potential for appreciation is significant. Secondly, there is an expectation that the earnings growth of small and mid-cap companies will converge with, or even surpass, that of large-cap companies, providing a powerful catalyst for performance. Lastly, the expanding opportunities related to artificial intelligence are expected to broadly benefit these companies, offering new avenues for innovation and growth. The fund's strategy is centered on identifying and investing in businesses that demonstrate strong growth, driven by a deep, bottom-up fundamental analysis across all market capitalization sizes, aiming to capitalize on the market's potential mispricing of future growth trajectories.